Borrowing costs hike doesn’t affect well-repaid loans

By Bahle Gama

Diligent loan repayment cushions consumers against interest rate hikes. This was an observation made by Eswatini Bankers Association (EBA) CEO Zakhele Lukhele.

On November 25, the Central Bank of Eswatini (CBE) increased its interest rate from 6 to 6.5 per cent resulting in banks increasing their prime lending rate on loans extended to individuals and businesses to 10 per cent until the next monetary policy meeting.

Responding to the effects these hikes have on the property sector and the balance of a loan/bond after two years, Eswatini Bankers Association (EBA) CEO Zakhele Lukhele said a loan if repaid diligently and without any defaults, will have decreased from the repayments over the two years.
“The bond will constantly decline if the loan is serviced properly,” said the CEO.

For instance, a loan of E1 million taken two years ago at the prevailing prime rate of 7.25 per cent then, and repayable over 10 years would be at around E980 000 two years later, the reason being that a loan repayment instalment has a capital and an interest portion.

“The loan repayment capital portion will not be affected by the fluctuations in interest rates, so the loan will be repaid in the same period it was set for as long as it is serviced properly without any defaults. The instalment though, because of the changes in the interest portion will have increased between then and now. Therefore, the bond amount will reduce normally while the component that goes to interest will change. increase in this instance,” said Lukhele.

He further stated that the interest rates between the two years will increase the instalment. Between July 2020 and now, the prime rate has increased from 7.25 per cent to 10 per cent, a loan repayment on the loan of E1 million at prime over 10 years will have increased by about E1 400 per month.

“The difference will of course vary by size of the loan, interest rates, and repayment period. It is therefore important for a borrower to anticipate these changes and particularly so when rates are unusually low as they were two years ago,” said Lukhele.

In terms of the forced sales of properties due to defaults, Lukhele said it is expected that as interest rates increase, customers will face more difficulty in servicing their loans.

“In the absence of figures, one cannot say any increase in distressed sales is due to the rise in interest rates, and one may not look just at interest rates but at the general economic climate. It is a fact that economic conditions have been quite difficult and rising prices, so people have to prioritise expenditure. Distressed house sales however usually pick up very slowly as people will try to hold on to their essential assets and reduce expenditure in other areas,” he said.

As difficulties arise, the CEO further urged customers to approach their respective banks to seek solutions. Meanwhile, on November 24, the MPC in South Africa announced that the repo rate would climb to 7 per cent leaving the prime lending rate at 10.5 per cent, 0.5 per cent higher compared to Eswatini.

REMAX Regional Director and CEO Adrian Goslett said these hikes were to be expected, putting into consideration the global trends emerging.
He stated that with interest rates and inflation rising across the world, it could be expected that the MPC would increase rates in response to the global uncertainty adding that this is why they have been encouraging homeowners to reduce their debt levels, as affordability will become an increasing concern for them over time.

“The effects of these interest rate hikes only become evident a few months after consumers adjust to paying the higher debt instalments, but we have already started seeing the signs that property market activity is shifting. Over the last two months, our digital marketing agency has noted a rise in rental-related search terms and a decline in buying search terms, which points to a coming shift in the local housing market,” he said.

He further advised real estate agents to start preparing themselves for leaner times, stating that since the pandemic there had been an abundance of buyers, however, this is likely to change now, “so real estate professionals will need to build out their networks as much as they can before the conditions change.”

However, Goslett highlighted that interest rates are roughly back to where they were before Covid-19 and are not yet at abnormally high levels.
“While interest rates are still manageable at this point, I recommend that all homeowners make sure to put themselves in a position to be able to afford the higher repayments on the home loan as well as other debts they might hold. Many economists predict that our GDP is likely to shrink in 2023, which could put further pressure on individuals. Reducing debt now will make any future interest rate hikes more bearable,” Goslett added.

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